Dow December: Are More Record Highs a Sure Thing?

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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrials (DJINDICES: ^DJI  ) closed November on a mildly disappointing note, just barely failing to set its sixth-straight all-time daily closing high Friday as investors backed off their early optimism over early holiday-shopping results that showed strength in the overall economy. But many traders who pay attention to seasonal factors have noted that historically, the Dow has often posted strong gains in December. With the Dow at record highs, even investors who don't follow seasonal indicators are curious to see whether that trend will continue this year.

Looking at the Dow as a whole, it's easy to understand why those who pay attention to seasonal patterns are enthusiastic about the average's prospects. In each of the past four years, December has been a positive month for the Dow, with the biggest gains of about 5% coming in 2010. Moreover, even in the midst of the financial crisis in late 2008, the Dow only lost about 50 points in December, with much worse losses having come earlier in the fall and later in the succeeding winter.

Going back further, the December Dow phenomenon was less reliable but often produced sharper gains when it worked. The Dow fell during December in 2007 and 2005, and 2002 produced its worst showing in the past 15 years, falling 6%. Yet Decembers also produced strong gains in many years, including 6% to 7% gains in 1999 and 2003.

Yet when you look at the individual stocks that will have the most influence on the Dow going forward, the seasonal impact is somewhat less clear. Visa (NYSE: V  ) , the highest-priced Dow component currently, saw positive results in three of the past four years before it become a member of the Dow, but it fell in 2010 despite the overall market's big push higher. IBM (NYSE: IBM  ) has more consistently followed the Dow's overall trend, but even it fell sharply in 2009 despite the Dow's overall gains. And for Dow newcomer Goldman Sachs (NYSE: GS  ) , losses in 2011 bucked the market's gains, and it also lost ground in 2004 and 2007 to a greater extent that the overall market did.

Clearly, the stock market has strong momentum propelling it higher right now, and that argues in favor of the Dow following its seasonal pattern this year. But nothing about stocks is a sure thing, and it's just as important as ever for long-term investors not to get caught up too much in short-term factors and instead focus their attention on finding the companies with the best potential to produce solid results both this December and in the years and decades to come.

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